10 questions and answers on CSDD (Corporate Sustainability Due Diligence Directive)

Due diligence is a process that enables companies to identify, prevent, mitigate and account for how they address their actual and potential adverse impacts. In this post we summarize the highlights of the new European directive on corporate sustainability due diligence, focusing especially on those aspects that affect waste management.

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1.- What is the background of the new Directive?

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The new CSDD or CS3D (Corporate Sustainability Due Diligence Directive or Corporate Sustainability Due Diligence Regulation) is based on:

• the United Nations Guiding Principles on Business and Human Rights (2011),
• in the OECD Guidelines for Multinational Enterprises,
• on the importance of responsible behavior on the part of companies,
• and is in line with internationally recognised labor and human rights standards.

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Several EU member states (including France, the Netherlands and the UK) already have national ESG (Environmental, Social and Corporate Governance criteria) due diligence standards in place. The EU-wide directive aims to harmonize enforcement and civil and criminal liability frameworks, as well as to expand efforts across the bloc.

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The approval of this Directive by the European Parliament on June 1 leaves the new regulation one step away from its definitive implementation.

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Despite this progress at the EU level, Spanish national regulations have still not progressed since 2022, when the public consultation round was opened.

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2.- What are the objectives of the CSDD?

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This proposal aims to impose due diligence with respect to potential or actual adverse impacts on:

• human rights (e.g., child labor and exploitation of workers)
• and the environment (e.g., pollution and biodiversity loss) resulting from the activities of the companies themselves, their subsidiaries and their global value chains.

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3.- What is the scope of application of the CSDD?

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Will apply to large EU companies (over 500 employees and €150 million in global turnover) and other high impact companies in specific sectors (over 250 employees and €40 million in global turnover).

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The Directive considers the textile (including footwear), agricultural, fishing, food producers, animal, wood, food or beverage traders; extraction, marketing and/or intermediation of minerals (from metals to natural gas); and manufacturers of metal products or other minerals (with the exception of machinery or equipment) to be high impact sectors.

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Specifically, the proposed Directive will apply to the following companies:

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Companies incorporated in the EU

• With more than 500 employees + worldwide net sales in excess of €150 million (in the last year for which annual accounts have been prepared).
• With more than 250 employees + worldwide net turnover of more than 40 M€ (in the last year for which annual accounts have been prepared) + at least 50% of its turnover is produced in identified high impact sectors.

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Companies incorporated in a third country

• With a net turnover in the EU of more than €150 million (in the year prior to the last financial year).
• With a net turnover in the European Union of more than 40 M€ (in the year preceding the last financial year) + at least 50% of its turnover is in identified high impact sectors.

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The Directive will affect the first group of companies with a turnover of more than 150 M € in Europe or European within 2 years after its implementation, and the second group after 4 years (provided that at least 50% of their turnover is produced in identified high impact sectors).

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4.- How will the CSDD affect companies outside the EU?

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Non-EU companies will also be subject if they meet the above-mentioned thresholds (reaching a specific EU turnover or generating revenues in specific high-risk sectors) and operate in the EU.

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Companies from third countries included in the scope must appoint an authorized representative within the EU.

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Even if the company falls outside the scope of the EU CSDD, increased pressure to align operations and supply chains with ESG objectives is likely to drive similar legislation in other jurisdictions.

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5.- How will the CSDD affect SMEs?

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This proposal for a Directive does not propose rules directly applicable to small and medium-sized companies, but it does establish that, in the event that they are suppliers or participate in any way in the supply chain of any eligible company, they must be aligned with the policies of the latter.

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In the event that such SMEs do not have their own capacity to comply with the company's policies, the company will be responsible for supporting them to improve their performance.

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The proposal provides for specific support to help SMEs to gradually incorporate sustainability aspects into their business activity.

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6.- How will the CSDD affect the waste vector?

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The CSDD considers that for due diligence to have a significant impact, among other measures, it should cover "adverse environmental impacts generated throughout waste management". These adverse impacts occur "in companies' own operations, subsidiaries, products, services and value chains, in particular in the sourcing of raw materials [...] or in the disposal of products or waste".

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When "a company sources products containing recycled material, it can be difficult to verify the origin of secondary raw materials." For that reason, "the company should take appropriate steps to trace the secondary raw materials back to the relevant supplier and assess whether adequate information exists to demonstrate that the material is recycled."

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7.- How will compliance be ensured?

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Member States shall:

• supervise that companies comply with their obligations and, in this regard, may impose sanctions or issue orders requiring compliance;
• designate a competent national authority to ensure that they are enforced and that the sanctions imposed are effective, dissuasive and proportionate. In addition, where penalties are monetary, they must be proportionate to the company's business model;
• In addition, they will have to provide a means of communication so that any natural or legal person can exercise their right to raise concerns if there are suspicions that a company could have identified or mitigated an adverse impact with appropriate due diligence measures.

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Companies will be required to:

• identify and, where necessary, prevent, terminate or mitigate the negative impact of their activities on human rights and the environment, such as child labor, slavery, labor exploitation, pollution, environmental degradation and biodiversity loss.
• monitor and assess the impact of their partners in the value chain, including not only suppliers, but also sales, distribution, transportation, storage, waste management and other areas.

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8.- How will it benefit companies?

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The approval of the Directive will mean for the companies subject to that standard:

• To have common and clear rules on corporate sustainability due diligence.
• An incentive for consumers to be more attracted to ethically and environmentally sustainable products, which will bring more profit.
• Better meet the expectations of investors who demand transparency requirements and consistent benchmarks to be sure of the due diligence standards applied in the value chain.
• Strengthen risk management and increase the resilience of companies by better integrating social, environmental and health considerations into their business strategies.

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9.- When will it become effective?

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In June 2023 the European Parliament approved the amendments submitted to the CSDD proposal made by the European Commission.
The EU intends to finalize and formally adopt the Act by 2024.

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10.- What do environmental advocates, member states and industry representatives think?

Environmental advocates point to loopholes in the new regulations, such as the exemption of some financial institutions and proposed delays in implementation deadlines.

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On the other hand, member states and industry representatives have objected to the scale and ambition of the current EU environmental regulatory drive, as well as its timing. Industry groups also cite the potential of the proposed directive to stifle investment and open the floodgates to litigation against companies.

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For more information:

• Where does the producer's shared responsibility end? Miguel Varela, 19.04.2023

Sources:

• Proposal for a Directive of the European Parliament and of the Council on corporate sustainability due diligence and amending Directive (EU). Eur Lex, 23.02.2022
• Why It's Important That European Governments Are Moving To Regulate The Treatment Of Workers Globally. Forbes, 06.06.2023
• The European Parliament adopts its position on the Corporate Sustainability Due Diligence Directive. Garrigues, 07.06.2023

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